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Buying & Selling Call Options – “Call”-ing All Traders

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Introduction

 

 

As you can already tell, binary options are an advanced and complicated asset that is traded for a relative short period of time. They tend to expire from as little as a week – to as long as a year. Binaries can be both bought and sold through what are known as “calls and puts” but don’t worry, we will take things slow and cover the aspects of calls and puts individually.

In this lesson, you’ll learn the key components of buying and selling call options – how they work, the different types of trades that you can make with naked call options – but most importantly, we will discuss some of the terminology that is involved with buying and selling calls.

But before we begin, we would like you to read and agree to the Terms & Conditions of this post before you proceed any further.

Disclaimer: Invest In Wall Street is in no way financially or legally responsible for any investing decisions made by any of our readers and are, in turn, acting on their own free will. The information in this article is purely educational and should not be abused or misconstrued in any way, shape, or form.

 

Let’s start by reviewing the definition of a call option.

 

Buying and Selling Call Options

 

 

A call option gives the buyer the right to buy a stock at a set price at or before a specified date.

The terms of an options contract can be seen on the option table. Calls are listed on the left and strike prices are displayed in the center. You can also see the months and number of calendar days to expiration.

A strike price is the price you can buy shares of stock at or before expiration day – and an expiration is the date when the option is no longer valid.

Keep in mind that you can be an option buyer or an option seller, which brings us to our next vocabulary words.

In the investing world, the word “long” means you’ve purchased a security. Similarly, if you buy a call – you own a long call. However, you can also sell a security to initiate or open a trade.

 

 

When you sell to open a trade, you’re in a short position. Likewise, you can also open a trade by selling a call option.

 

 

So….. if you’re bullish you buy a call, but if you’re bearish you sell a call.

This means that there are two sides to every trade, a bullish and a bearish, or in other words – a buyer and a seller.

If the call option buyer has the right to exercise the option and buy the shares at the strike price, then the options seller is obligated to deliver those shares.

If the stock rises above the strike price, then the buyer would profit. However, if the stock falls below the strike price, the call option seller could profit.

This brings us to the next set of vocabulary, option prices. This can be viewed in what is called an option table (A vast display of various prices to buy and sell – along with set strike prices), it is here that you’ll see two prices known as the “bid” and the “ask”.

To open a long position, you’ll buy at the ask price. On some trading platforms, to initiate a call trade you may have to use the term “buy to open” to designate it’s a long position. To close the long position, you’ll use the term “sell to close”.

 

 

A short call position is opened by selling at the bid price. A short position is initiated with “sell to open”, which means you’re selling an option to open a position. To close this position you select the term “buy to close”.

 

 

One more term you should know is “the spread” – this is the difference between the bid and the ask prices.

There are also several other terms commonly found on the option table, such as volume, which is the number of contracts traded that day.

The “at the money” call is the option closest to the stock price. It is usually the most traded, and often has the narrowest spread.

The deeper in the money and the further out of the money an option contract is, the lower it’s trading volume typically is.

Typically there is also lower open interest in the strikes that are further away from the “at the money” option. Open
interest is the number of contracts that are currently in circulation.

High volume and open interest can help you get a better price for your option when you buy and sell. It will also give you a smaller bid/ask spread. A smaller bid/ask spread can help you get a better price.

 

 

As you can see, there are a lot of key terms when it comes to call options. You buy to open and sell to close long calls, then you sell to open and buy to close short calls.

Ideally, options investors would want to trade options that have high volume and open interest so you can have low bid/ask spreads.

 

Quick Recap

In Review…..

Buying & Selling Call Options: Basic Vocabulary

 

  • Call Option = gives the buyer the right to buy a stock at a set price at or before a specified date
  • Option Table = Where the terms of an options contract can be seen. Calls are listed on the left and strike prices are displayed in the center. You can also see the months and number of calendar days to expiration
  • Strike Price = The price you can buy shares of stock at or before expiration day
  • Expiration = The date when the option is no longer valid
  • “Long” = You are BUYING an asset. To “Go Long” means to buy
  • “Short” = You are SELLING an asset. To “Short” means to sell
  • Bid = Price to SELL at
  • Ask = Price To BUY at
  • Spread = The difference between the bid and the ask prices
  • Volume = The number of contracts traded that day
  • Open Interest = The number of contracts that are currently in circulation

 

Buying & Selling Options – CALL OPTIONS ONLY

 

  • Long Call (“Go Long”) = Buy to open and sell to close (Bullish – the buyer). You profit when stock rises above strike
  • Short Call (“Go Short”) = Sell to open and buy to close (Bearish – the seller). You profit when stock falls below strike
  • “At The Money” = The strike price closest to the stock price
  • “In The Money” = For a CALL option, this would be a strike BELOW the current market price
  • “Out Of The Money” = For a CALL option, this would be a strike ABOVE the current market price

 

  • If the call option buyer has the right to exercise the option and buy the shares at the strike price, then the options seller is obligated to deliver those shares
  • To open a long position, you’ll buy at the ask price. On some trading platforms, to initiate a call trade you may have to use the term “buy to open” to designate it’s a long position. To close the long position, you’ll use the term “sell to close”
  • A short call position is opened by selling at the bid price. A short position is initiated with “sell to open”, which means you’re selling an option to open a position. To close this position you select the term “buy to close”
  • The deeper in the money and the further out of the money an option contract is, the lower it’s trading volume typically is
  • Typically there is also lower open interest in the strikes that are further away from the “at the money” option. Open interest is the number of contracts that are currently in circulation
  • High volume and open interest can help you get a better price for your option when you buy and sell. It will also give you a smaller bid/ask spread. A smaller bid/ask spread can help you get a better price
  • Ideally, options investors would want to trade options that have high volume and open interest so you can have low bid/ask spreads

 

 

 

This has been an in-depth and through look at buying and selling calls at a beginner- friendly level. I know that learning the terminology for the first time may seem a little intimidating, but give it a few weeks – one month tops – to let these terms sink in.

Notice that this lesson has only covered the purchase and selling of calls only – it’s important to know that buying and selling puts have the same general principles as call options, but it’s the opposite, but not to worry, we will be covering puts in another lesson, as you continue your binary options education here at Invest In Wall Street.

I hope you have enjoyed this post and found the information to be quite useful. If you have any questions or concerns, please feel free to leave them down in the comment thread below and make sure to like and share this post.

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